Financial Statements (With Independent Auditors Report Thereon)
Table of Contents Independent Auditors Report 1 Management s Discussion and Analysis (Unaudited) 3 Financial Statements: Page Statement of Net Position 14 Statement of Revenue, Expenses, and Changes in Net Position 16 Statement of Cash Flows 17 19 Required Supplementary Information Schedule of the Electric Utility's Proportionate Share of the Net Pension Liability and Related Ratios 55 Schedule of Electric Utility Pension Plan Contributions 56
KPMG LLP Suite 700 20 Pacifica Irvine, CA 92618-3391 Independent Auditors Report The Honorable City Council City of Anaheim, California: We have audited the accompanying financial statements of the Electric Utility Fund of the City of Anaheim, California (the Fund), as of and for the years ended, and the related notes to the financial statements, as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Electric Utility Fund of the City of Anaheim, California as of, and the changes in its financial position and its cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles. Emphasis of Matters As discussed in note 1, the financial statements present only the Fund, and do not purport to, and do not, present fairly the financial position of the City of Anaheim, California (City) as of, the changes in its financial position or, where applicable, its cash flows, for the years then ended in accordance with U.S. generally accepted accounting principles. Our opinion is not modified with respect to this matter. KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.
Other Matters Required Supplementary Information U.S. generally accepted accounting principles require that the management s discussion and analysis on pages 3 13, the schedule of the Electric Utility s proportionate share of the net pension liability and related ratios and the schedule of Electric Utility pension plan contributions on pages 55 and 56 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Management has omitted the discussion of 2016 information in the management s discussion and analysis that U.S. generally accepted accounting principles require to supplement, although not required to be part of, the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of the financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audits of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 20, 2017 on our consideration of the City of Anaheim s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City of Anaheim s internal control over financial reporting and compliance. Irvine, California December 20, 2017 2
Management s Discussion and Analysis (Unaudited) June 30, 2017 As management of Anaheim Public Utilities, a department of the City of Anaheim (the City), we offer the readers of the City of Anaheim Electric Utility Fund (Electric Utility) financial statements a narrative overview and analysis of the financial statements for the fiscal year ended June 30, 2017. We encourage readers to consider the information presented here in conjunction with the accompanying financial statements. Financial Highlights The Electric Utility s total net position for fiscal year 2017 was $355,821. An increase of $1,973 (0.6%), from the total net position for fiscal year 2016. Net investment in capital assets increased by $14,470 (5.2%) as a result of improvements made to the Electric Utility s distribution system. The Electric Utility s Public Benefit Program expended $6,695 in community service-related programs for the 2017 fiscal year. The program provides public benefits in the areas of energy efficiency incentives, low-income rate discounts, lighting incentives, and renewable energy for residential and business customers. During this fiscal year, the Electric Utility started construction of the new 69-12KV Harbor Substation which total construction cost is estimated at $51,000 including the substation plus the transmission and distribution system. Construction of this substation is necessary in order to meet demand added by new developments within the City. The substation will be located Northeast corner of Katella Avenue and Zyen Street, west of Anaheim Blvd. As of June 30, 2017, 5.6% of total cost has been expended. Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the Electric Utility s financial statements. Because the Electric Utility is a business-type activity of the City, an enterprise fund is used to account for its operations. These financial statements include only the activities of the Electric Utility and provide comparative information for the last two fiscal years. Information on citywide financial results is available in the City s Comprehensive Annual Financial Report as of June 30, 2017. The Electric Utility s financial statements comprise two components: (1) financial statements and (2) notes to financial statements. Included as part of the financial statements are the statement of net position, statements of revenue, expenses, and changes in net position, and statements of cash flows. The statements of net position present information on assets and deferred outflows of resources, and liabilities and deferred inflows of resources with the difference between the two reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial condition of the Electric Utility is improving or deteriorating. The statements of revenue, expenses, and changes in net position present the Electric Utility s revenue and expenses during this fiscal year. The statements provide information showing how the Electric Utility s net position changed. 3 (Continued)
Management s Discussion and Analysis (Unaudited) June 30, 2017 The statements of cash flows present the flows of cash and cash equivalents provided by and used for operating activities, other cash sources, and uses in capital as well as investing activities during this fiscal year. The notes to financial statements provide additional information that is essential to the full understanding of the data provided in the financial statements. Financial Analysis The Electric Utility s condensed statements of net position at June 30 are as follows: Condensed Statements of Net Position 2017 2016 Current and other assets $ 571,373 491,219 Net utility plant 894,237 881,858 Deferred outflows of resources 30,164 13,014 Total assets and deferred outflows or resources 1,495,774 1,386,091 Long-term liabilities, net of current portion 944,304 853,161 Current liabilities 89,798 81,330 Deferred inflows of resources 105,851 97,752 Total liabilities and deferred inflows of resources 1,139,953 1,032,243 Net investment in capital assets 294,820 280,350 Restricted 43,682 39,200 Unrestricted 17,319 34,298 Total net position $ 355,821 353,848 As of June 30, 2017 Assets and Deferred Outflows of Resources Total assets and deferred outflows of resources as of June 30, 2017 were $1,495,774 reflecting an increase of $109,683 (7.9%) mainly due to the following: Current and other assets, comprising restricted and unrestricted assets, had a net increase of $80,154 (16.3%). Restricted assets increased by $79,499 mainly due to an increase of $100,000 related to the 2016-AB bond proceeds offsetting by $30,951 spend down of the 2015-B bond proceeds for capital improvement projects. 4 (Continued)
Management s Discussion and Analysis (Unaudited) June 30, 2017 Unrestricted assets increased by $655 primarily due to increase in accounts receivable billed to customers. Deferred outflows of resources, consisting of deferred charge on refunding bonds and deferred pension related items increased by $17,150 (131.8%), mainly due to an increase of $7,908 from current year addition of deferred charge on refunding bonds $9,529 resulting from the issuance of the 2016-A,B Refunding Revenue bonds offset by the current year amortization of $1,621. Deferred outflows of resources related to pension increased by $9,242 resulting from the Electric Utility s proportion of the unamortized deferred outflow arising from differences between the projected and actual earnings of the pension plan assets of the City s miscellaneous pension plan. Liabilities and Deferred Inflows of Resources Total liabilities and deferred inflows of resources as of June 30, 2017 were $1,139,953 reflecting a total net increase of $107,710 (10.4%) due to the following: Long-term liabilities, increased by $91,143 (10.68%). The long-term debt, net of current portion, had a net increase of $88,034 (13.3%) primarily due to a net increase of $119,268 in principal and premium from the $289,065 2016-A&B Anaheim Housing Public Improvement Authority (AHPIA) bond issuance which refunded the remaining balance of the 2007-A Anaheim Public Financing Authority (APFA) Revenue bonds ($146,720) and advance refunded the 2009 Revenue bonds ($58,260), offsetting by a reduction of current fiscal year principal due within one year of $20,874 and the current year amortization of $7,341 premium. The Electric Utility is continually strengthening its financial position through refunding old bonds and issuing new bonds at lower rates. (See note 7 of the notes to financial statements for additional information regarding long-term liabilities.) Long-term provision for decommissioning costs decreased a total of $3,517 (2.9%) mainly due to current year s payments toward the related liability. Current liabilities, increased by $8,468 (10.4%) mainly due to a $15,877 increase in accounts payable and accrued expenses and increase of $3,125 in current portion of the revenue bonds, offsetting by $13,200 payment in full of the Electric System note during the current fiscal year. Deferred inflow of resources, consisting of regulatory credits and deferred pension related items increased by $8,099 (8.3%) due to an increase in regulatory credits of $7,738 and an increase in deferred pension of $361. (See notes 1 and 9 of the notes to financial statements for additional information regarding regulatory credits and pension.) Net Position The Electric Utility s net position, which represents the difference between the Electric Utility s total assets and deferred outflows of resources less total liabilities and deferred inflows of resources, may serve over time as a 5 (Continued)
Management s Discussion and Analysis (Unaudited) June 30, 2017 useful indicator of the Electric Utility s financial position. This net position at June 30, 2017, totaled $355,821, an increase of $1,973 (0.7%) mainly due to the following: The net investment in capital assets of $294,820 reflects the investment in the Electric Utility s capital assets, less any related outstanding debt used to acquire those assets. This portion increased by $14,470 (5.2%) due to the Electric Utility investing in more capital assets to provide reliable and efficient services to customers. Resources needed to repay the outstanding debt must come from other sources such as operations revenue. The restricted net position total of $43,682 represents resources reserved for external restrictions on how they may be used, such as debt service payments, the Public Benefit Program, and other legally restricted purposes. This portion increased by $4,482 (11.4%) primarily due to an increase of $7,730 of resources required for debt service payments related to the 2016A,B bond issuance. This increase is partially offset by a decrease in debt service payments related to the refunding of the 2007A bond issuance of $2,573. The unrestricted net position of $17,319 decreased by $16,979. This portion reflects the results of operations and may be used for ongoing operational needs and obligations to our creditors and customers. 6 (Continued)
Management s Discussion and Analysis (Unaudited) June 30, 2017 The Electric Utility s statements of revenue, expenses, and changes in net position for the years ended June 30 are summarized as follows: Condensed Statements of Revenue, Expenses, and Changes in Net Position 2017 2016 Revenue: Retail sales, net $ 372,282 372,621 Wholesale sales 24,372 11,568 Rate stabilization account revenue 7,000 Surplus natural gas sales 961 312 Transmission revenue 31,457 31,122 Other revenue 4,489 7,862 Interest income 2,244 3,259 Capital contributions 3,023 9,186 Total revenue 438,828 442,930 Expenses: Purchased power 263,729 239,863 Fuel and generation 19,337 20,833 Operations, maintenance, and administration 50,128 52,635 Depreciation 56,796 56,019 Interest expense 22,192 21,523 Total expenses 412,182 390,873 Transfers: Transfer to the General Fund of the City (19,032) (17,358) Transfer of right-of-way fee to the City (5,694) (5,838) Transfer of land to the City (1,428) Transfers from other funds of the City 53 110 Total transfers (24,673) (24,514) Changes in net position 1,973 27,543 Net position at beginning of year 353,848 326,305 Net position at end of year $ 355,821 353,848 7 (Continued)
Management s Discussion and Analysis (Unaudited) June 30, 2017 Revenue Year ended June 30, 2017 Total revenue for the year ended June 30, 2017 was $438,828, a decrease in total revenue of $4,102 (0.9%) mainly due to the following: Wholesale sales totaled $24,372. An increase of $12,804 (110.7%) was mainly due to an increase in wholesale energy sales due to a generally warmer year coupled with higher wholesale prices. Rate Stabilization Account (RSA) revenue recognized was $0. A decrease of $7,000 was due to positive operating results which resulted in no need to recognize RSA revenues in order to maintain a minimum reserve balance, and to retain a sound debt service coverage ratio of 2.02 for the Electric Utility Funds stable credit ratings in fiscal year 2017. Total Other Revenues, Interest Income and Capital contributions combined were $9,756. A combined decrease of $10,551 (52.0%) was due to lower miscellaneous revenues as well as decreased contributions in aid of construction ($6,163). Revenue by Source Year ended June 30, 2017 6% 7% 2% Retail Sales 85% Wholesale Sales 6% Transmission Revenue 7% Other Revenue 2% 85% 8 (Continued)
Management s Discussion and Analysis (Unaudited) June 30, 2017 Year ended June 30, 2016 1% 7% 5% 3% Retail Sales 84% Wholesale Sales 3% Rate Stablization Account 1% Transmission Revenue 7% Other Revenue 5% 84% Expenses Year ended June 30, 2017 Total expenses for the year ended June 30, 2017 were $412,182, an increase in total expenses of $21,309 (5.5%) mainly due to the following: Power costs totaled $263,729. An increase of $23,866 (9.9%) was due primarily to increased use of renewable resources and less recognition of Cap and Trade funds. Operation, maintenance, and administration totaled $50,128, a decrease of $2,507 (4.8%) mainly due to lower maintenance costs. Interest expense was $22,192, an increase of $669 (3.1%) primarily due to the issuance of the new $219,285 and $69,780 Anaheim Housing and Public Improvements Authority (AHPIA) Electric Refunding Revenue Bonds, Series 2016-A. and Series 2016-B respectively. The increase was partially offset by the advance refunding of the remaining 2007-A Bonds balance in the amount of $146,720 and a portion of the 2009-A Bonds in the amount of $58,260. Transfers Year ended June 30, 2017 Transfers to the City s General Fund, as defined by City Charter, are equal to a maximum of 4% of total operating revenue. The transfer to the City s General Fund was $19,032 for fiscal year 2017, which is based on the current year s total operating revenue and true-up adjustments on prior year s total operating 9 (Continued)
Management s Discussion and Analysis (Unaudited) June 30, 2017 revenue. There were no significant changes in the amount of transferred to the City during fiscal year 2017 when compared with prior fiscal year. The transfer of the right-of-way fee to the City is equal to 1.5% of retail electric revenue of the prior fiscal year. The right-of-way fee transferred to the City was $5,694 for fiscal year 2017. There were no significant changes in the amount of right-of-way fee transferred to the City during fiscal year 2017 when compared with prior fiscal year. Transfers from other funds of the City in fiscal year 2017 were $53 as compared with transfers from other funds of $110 in the prior fiscal year. The $57 decrease was related to reduction in joint capital assets with the Water Utility, which transferred its share to Electric Utility upon completion. Expenses and Transfers Year ended June 30, 2017 6% 5% 13% 12% 4% 60% Purchased Power 60% Fuel and Generation 4% O&M and Admin. 12% Depreciation 13% Transfers 6% Interest Expense 5% 10 (Continued)
Management s Discussion and Analysis (Unaudited) June 30, 2017 Year ended June 30, 2016 6% 5% 13% 13% 5% 58% Purchased Power 58% Fuel and Generation 5% O&M and Admin. 13% Depreciation 13% Transfers 6% Interest Expense 5% Capital Assets and Debt Administration Capital Assets The Electric Utility s capital assets as of June 30 are as follows: 2017 2016 Production $ 130,719 130,719 Transmission 97,235 96,727 Distribution 1,004,757 949,811 General plant 137,459 135,633 Land 34,243 34,243 Construction in progress 91,236 84,945 Total utility plant 1,495,649 1,432,078 Less accumulated depreciation (601,412) (550,220) Net utility plant $ 894,237 881,858 Additional information on the Electric Utility s capital assets can be found in note 3 of the notes to the financial statements. 11 (Continued)
Management s Discussion and Analysis (Unaudited) June 30, 2017 As of June 30, 2017 The Electric Utility s investment in utility plant, net of accumulated depreciation, was $894,237 as of June 30, 2017. An increase of $12,379 (1.4%) was due to total utility plant increasing by $57,280 (4.4%), which was partially offset by an increase in accumulated depreciation in the amount of $51,192 (9.3%) mainly due to the following: Distribution assets totaled $1,004,757, an increase of $54,946 (5.8%) mainly due to the completion of 7.83 circuit miles of underground conversion on Miraloma Avenue as well as installation of 14,987 feet of direct buried cable and the purchase of 149 new transformers. General plant assets totaled $137,459, an increase of $1,826 (1.4%) mainly due to installation of fiber optic equipment, upgrading communication equipment, and improvements to general facilities. This updated system will provide more efficient and functional services to Anaheim s customers. Construction in progress totaled $91,236, an increase of $6,291, (7.4%) mainly due to the replacement of aging overhead electrical lines with state-of-the-art underground projects such as continued improvements related to Phase 2 of Underground District #62 at Miraloma Ave. as well as the rehabilitation of the underground distribution system in the resort area in addition to the ongoing replacement of aging circuit breakers, poles, transformers and switches throughout the City. Also, during this fiscal year, the Electric Utility started construction of the new 69-12KV Harbor substation located Northeast corner of Katella Ave. and Zyen St. Accumulated depreciation of $601,412 increased by $51,192 (9.3%) mainly due to the current year s depreciation expense of $56,796, which includes $13,778 accelerated depreciation due to the early exit of the San Juan Coal Unit located in New Mexico. There was an offset of $5,604 related to retired assets. Long-Term Debt The Electric Utility s outstanding long-term debt as of June 30 is as follows: 2017 2016 Revenue bonds $ 705,225 640,090 Loan 301 Electric system notes 13,200 Long-term debt 705,526 653,290 Less: Current portion (20,874) (28,830) Unamortized bond premium 65,314 37,472 Total noncurrent long-term debt outstanding $ 749,966 661,932 12 (Continued)
Management s Discussion and Analysis (Unaudited) June 30, 2017 The Utility s bond indentures require the Utility to maintain a minimum debt service coverage ratio of 1.25. The Utility had a debt service coverage ratio of 2.02 at June 30, 2017. The revenue of the Electric Utility has been pledged to pay the outstanding long-term debt. The credit rating of the Electric Utility was AA-by Fitch Ratings, and AA-by Standard & Poor s Corporation. These ratings reflect the Utility s high debt service coverage levels, strong liquidity position, stable financial performance, and mature and diverse customer base. Additional information on the Electric Utility s long-term liabilities can be found in note 7 of the notes to financial statements. The long-term debt had a net increase of $80,078 (11.6%) primarily due to net increase of $119,268 in principal and premium from the $289,065 2016-A&B bond issuance which refunded the remaining balance of the 2007-A Revenue bonds ($146,720) and advance refunded the 2009 Revenue bonds ($58,260), and the issuance of the $316 megahertz communication equipment loan, offsetting by a reduction of current fiscal year principal payments of $32,164. Economic Factors and Rates California Senate Bill 1X 2 (California Renewable Energy resources Act) signed into law in April 2011 mandated that all California utilities are required to reach 33% by 2020, and 50% by 2030. The higher renewable power costs will increase future power supply costs, but the Electric Utility has a number of strategies to mitigate the potential cost impacts. Base electric rates were last revised by Anaheim s City Council effective September 1, 2015. On May 1, 2017 administrative modifications to the City s commercial and industrial rate schedules became effective which align the application of demand charges for consistency between the commercial and industrial rates. Other rate schedule modifications that became effective May 1, 2017 include conversion of two developmental rate schedules to permanent rate schedules with modifications to the time-of-use periods for one rate schedule to more closely align with market conditions. Additionally, customer service fees were revised effective May 1, 2017. The combination of these changes are not considered to have a material impact on the utility s revenue. Requests for Information This financial report is designed to provide a general overview of the Electric Utility s finances. Questions concerning any information provided in this report or requests for additional financial information should be addressed to the Assistant General Manager Finance and Administration, Anaheim Public Utilities, 201 South Anaheim Boulevard, Suite 1101, Anaheim, California 92805. 13
Statement of Net Position Assets 2017 2016 Utility plant: Production $ 130,719 130,719 Transmission 97,235 96,727 Distribution 1,004,757 949,811 General plant 137,459 135,633 Gross utility plant 1,370,170 1,312,890 Less accumulated depreciation (601,412) (550,220) Net plant in service 768,758 762,670 Land 34,243 34,243 Construction in progress 91,236 84,945 Net utility plant 894,237 881,858 Restricted assets: Cash and cash equivalents 204,229 66,053 Investments 100,659 160,432 Total restricted assets 304,888 226,485 Other assets: Prepaid purchased power 68,275 68,404 Unamortized prepaid bond insurance 344 Total other assets 68,275 68,748 Total noncurrent assets 1,267,400 1,177,091 Current assets: Cash and cash equivalents 16,908 14,385 Investments 58,780 58,587 Restricted Cash and cash equivalents 11,866 4,756 Restricted Investments 17,262 23,276 Accounts receivable, net 48,459 47,528 Accrued interest receivable 1,110 1,033 Interfund receivable 2,752 3,097 Materials and supplies 13,967 17,734 Prepaid items and other assets 15 Prepaid purchased power 27,091 25,590 Total current assets 198,210 195,986 Total assets 1,465,610 1,373,077 Deferred outflows of resources: Deferred charge of refunding 11,047 3,139 Deferred pension related items 19,117 9,875 Total deferred outflows of resources $ 30,164 13,014 14 (Continued)
Statement of Net Position Liabilities 2017 2016 Long-term liabilities: Long-term debt obligation, less current portion $ 749,966 661,932 Net pension liabilities 77,861 71,235 Provision for decommissioning costs 116,477 119,994 Total long-term liabilities 944,304 853,161 Current liabilities (payable from restricted assets): Current portion of long-term debt 15,648 18,823 Accounts payable 5,744 1,604 Wages payable 147 153 Arbitrage rebate liabilities 76 450 Accrued interest 7,513 7,002 Total restricted current liabilities 29,128 28,032 Current liabilities (payable from unrestricted current assets): Current portion of long-term debt 5,226 10,007 Accounts payable and accrued expenses 50,738 39,001 Wages payable 536 441 Deposits 4,170 3,849 Total unrestricted current liabilities 60,670 53,298 Total liabilities 1,034,102 934,491 Deferred inflows of resources: Deferred regulatory credits 98,218 90,480 Deferred pension related items 7,633 7,272 Total deferred inflows of resources 105,851 97,752 Net position: Net investment in capital assets 294,820 280,350 Restricted for: Debt service 16,748 14,196 Renewal and replacement 16,060 15,938 Other purposes 10,874 9,066 Unrestricted 17,319 34,298 Total net position $ 355,821 353,848 See accompanying notes to financial statements. 15
Statements of Revenues, Expenses, and Changes in Net Position Years ended 2017 2016 Operating revenues: Retail sales of electricity, net $ 372,282 372,621 Wholesale sales of electricity 24,372 11,568 RSA revenues 7,000 Surplus natural gas sale 961 312 Transmission revenues 31,457 31,122 Other revenues 4,489 7,862 Total operating revenues 433,561 430,485 Operating expenses: Purchased power 263,729 239,863 Fuel and generation 19,337 20,833 Operations, maintenance, and administration 50,128 52,635 Depreciation 56,796 56,019 Total operating expenses 389,990 369,350 Operating income 43,571 61,135 Nonoperating revenues (expenses): Interest income 2,244 3,259 Interest expense (22,192) (21,523) Transfer of land to the City (1,428) Total net nonoperating expenses (19,948) (19,692) Income before capital contributions and transfers 23,623 41,443 Capital contributions 3,023 9,186 Transfer to the General Fund of the City (19,032) (17,358) Transfer of right of way fee to the City (5,694) (5,838) Transfers from other funds of the City 53 110 Changes in net position 1,973 27,543 Net position at beginning of year 353,848 326,305 Net position at end of year $ 355,821 353,848 See accompanying notes to financial statements. 16
Statements of Cash Flows Years ended 2017 2016 Cash flows from operating activities: Receipts from customers and users $ 437,980 442,376 Receipts from services provided to other funds of the City 2,709 2,114 Payments to suppliers (262,435) (272,120) Payments to employees (45,293) (43,412) Payments for services provided by other funds of the City (12,762) (11,695) Net cash provided by operating activities 120,199 117,263 Cash flows from noncapital financing activities: Proceeds from short-term borrowings of line-of-credit 11,008 Payments on short-term borrowings of line-of-credit (12,631) Payments for decommissioning costs (4,270) (16,598) Transfers to the General Fund and other funds of the City (24,726) (23,196) Net cash used for noncapital financing activities (28,996) (41,417) Cash flows from capital and related financing activities: Proceeds from borrowings 324,248 106,837 Principal payments on long-term debt (32,164) (25,240) Transfer to escrow account (214,176) (66,973) Capital purchases (61,208) (53,331) Receipt of interfund balance for capital purposes 345 Interest paid (29,889) (27,330) Issuance costs (910) (424) Transfers from other funds of the City for capital purposes 50 107 Proceeds from issuance of loan 315 Capital contributions 2,234 5,785 Net cash used for capital and related financing activities (11,155) (60,569) Cash flows from investing activities: Purchases of investment securities (53,969) (111,574) Proceeds from sale and maturity of investment securities 118,055 128,438 Interest income received 3,675 4,275 Net cash provided by investing activities 67,761 21,139 Increase in cash and cash equivalents 147,809 36,416 Cash and cash equivalents at beginning of year 85,194 48,778 Cash and cash equivalents at end of year $ 233,003 85,194 17 (Continued)
Statements of Cash Flows Years ended 2017 2016 Reconciliation of operating income to net cash provided by operating activities: Operating income $ 43,571 61,135 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 56,796 56,019 Increase in provision for decommissioning costs 753 441 Changes in assets, liabilities and deferred inflows of resources that provided (used) cash: Accounts receivable, net (931) (1,260) Materials and supplies inventory 3,767 (1,290) Prepaid purchased power (1,387) 7,951 Accounts payable and accrued expenses 11,737 (19,953) Wages payable (2,166) (1,045) Regulatory credits 7,738 15,137 Deposits 321 128 Total adjustments 76,628 56,128 Net cash provided by operating activities $ 120,199 117,263 Schedule of noncash investing, capital, and financing activities: Capital contributions $ 789 3,401 Transfers from other funds of the City 53 3 Transfers from other funds of the City (1,428) Increase (decrease) in fair value of investments (1,508) 661 Reconciliation of cash and cash equivalents: Cash and cash equivalents $ 16,908 14,385 Restricted cash and cash equivalents, current portion 11,866 4,756 Restricted cash and cash equivalents, noncurrent portion 204,229 66,053 Total cash and cash equivalents $ 233,003 85,194 See accompanying notes to financial statements. 18
(1) Summary of Significant Accounting Policies Basis of Accounting The Electric Utility Fund (the Electric Utility) of the City of Anaheim, California (City) was established on June 30, 1971, at which time the portion of the City s General Fund net position related to electric system operations was transferred to the Electric Utility. The financial statements of the Electric Utility, an enterprise fund, are presented on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles and methods prescribed by the Federal Energy Regulatory Commission (FERC). The Electric Utility is not subject to the regulations of the FERC. New Accounting Pronouncements; Changes in Accounting Principles and Restatements On July 1, 2016, the Electric Utility adopted the following new accounting pronouncements issued by the GASB: GASB Statement No. 77, Tax Abatement Disclosures. The requirements of this Statement are effective for fiscal year beginning after December 15, 2015. GASB Statement No. 78, Pensions Provided through Certain Multiple-Employer Defined Benefit Pension Plans. The requirements of this Statement are effective for fiscal year beginning after December 15, 2015. GASB Statement No. 80, Blending Requirements for Certain Component Units An Amendment of GASB Statement No. 14. The requirements of this Statement are effective for fiscal year beginning after June 15, 2016. Statement No. 82, Pension Issues an amendment of GASB Statement No. 67, 68, and 73. The requirements of this Statement are effective for fiscal year beginning after June 15, 2016, except for the provision of paragraph 7 in a circumstance in which an employer s pension liability is measured as of a date other than the employer s most recent fiscal year-end. In that circumstance, the requirements of paragraph 7 are effective for that employer in the first reporting period in which the measurement date of the pension liability is on or after June 15, 2017. Implementation of these Statements had no material effect on amounts reported in the Electric Utility s financial statements for fiscal year ended June 30, 2017. The Electric Utility is currently reviewing its accounting practices to determine the potential impacts on the financial statements for the following GASB Statements: Statement No. 75, Accounting and Financial Reporting for Post-employment Benefits Other Than Pension Plans. The requirements of this statement are effective for fiscal years beginning after June 15, 2017. Statement No. 81, Irrevocable Split-Interest Agreement. The requirements of this Statement are effective for fiscal year beginning after December 15, 2016. Statement No. 83, Certain Asset Retirement Obligations. The requirements of this Statement are effective for fiscal year beginning after June 15, 2018. 19 (Continued)
Statement No. 86, Certain Debt Extinguishment Issues. The requirements of this statement are effective for reporting periods beginning after June 15, 2017. Statement No. 87, Leases. The requirements of this statement are effective for reporting periods beginning after December 15, 2019. Electric Utility Plant and Depreciation The costs of additions to the Electric Utility plant in service and replacement of property units are capitalized. The Electric Utility plant is recorded at cost, including capitalized interest, or in the case of contributed plant, at fair market value at the date of the contribution. Cost includes labor, materials, allocated indirect charges such as engineering, supervision, construction, and transportation equipment, retirement plan contributions, and other fringe benefits, and certain administrative and general expenses. The cost of minor replacements is included in maintenance expense. The net book value of assets retired or disposed of, related salvage value, and cost of removal are recorded in accumulated depreciation. Depreciation of Electric Utility plant is provided by the straight-line method based on the following estimated service lives of the properties: Production Transmission and distribution General plant 30 years 20 to 75 years 5 to 50 years Pooled Cash and Investments The Electric Utility pools available cash with available cash from all funds of the City for the purpose of enhancing investment income through investment activities. Investments in U.S. Treasury obligations, U.S. agency securities, and corporate notes are carried at fair value based on quoted market prices. Participating guaranteed investment contracts and flexible repurchase agreements are carried at fair value. Money market mutual funds are carried at fair value based on the fund s share price. The City s investment in the State of California Local Agency Investment Fund (LAIF) is carried at fair value based on the value of each participating dollar as provided by LAIF. LAIF is authorized by California Government Code (Government Code) Section 16429 under the oversight of the Treasurer of the State of California. Commercial paper, nonparticipating guaranteed investment contracts, and negotiable certificates of deposit are carried at amortized cost (which approximates fair value). Interest income, which includes changes in fair value, on investments is allocated to all funds on the basis of average daily cash and investment balances. The Electric Utility s cash and investments pooled with the City Treasurer (the Treasurer) are carried at fair value based on the value of each participating dollar. Additional information pertinent to the value of these investments is provided in note 2. For the purpose of the statements of cash flows, the Electric Utility considers cash equivalents to be highly liquid short-term investments that are readily convertible to known amounts of cash and mature within three months of the date they are acquired. Cash and cash equivalents are included in the City s cash and investments pool and in accounts held by fiscal agents. 20 (Continued)
Restricted Assets Certain proceeds of the Electric Utility bonds, as well as certain resources set aside for their repayment, are classified as restricted on the statement of net position because they are maintained in separate bank accounts and their use is limited by applicable debt covenants. Additionally, resources set aside by the Electric Utility for future decommissioning of its former ownership share of the San Onofre Nuclear Generating Station, Units 2 and 3 (SONGS), and the San Juan Generating Station, Unit 4 (SJ) are classified as restricted on the statement of net position. Generally, the Electric Utility would first apply restricted resources when expenses incurred for which both restricted and unrestricted resources are available. Deferred Outflows of Resources Deferred outflows of resources represent consumptions of net position that apply to future periods and so will not be recognized as an outflow of resources (expense) until then. In the statements of net position as of, the Electric Utility reported deferred outflows of resources in this category of $30,164 and $13,014 that included $11,047 and $3,139 of deferred charge of refunding and $19,117 and $9,875 of deferred pension, respectively. A deferred charge on refunding results from the difference in the carrying value of debt and its reacquisition price. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. The deferred pension is the pension contribution made during the current fiscal year that will be applied as a reduction in pension liability in the next fiscal year or other items arising from changes in actuarial assumptions, differences between actual and projected experience, between actual and projected investment gains/losses, or changes in Electric Utility s proportion in the City s pension plan. This amount will be amortized and reported as a component in pension expense in future fiscal years (refer to note 9 in notes to financial statements). The Electric Utility reported $19,117 in this category. Deferred Inflows of Resources Deferred inflows of resources represent acquisitions of net position that apply to future periods and so will not be recognized as an inflow of resources (revenue) until that time. As of June 30, 2017 and 2016, the Electric Utility reported deferred inflow of resources of $105,851 and $97,752 that included $98,218 and $90,480 of regulatory credits and $7,633 and $7,272 of deferred pension, respectively. Regulatory credits represent amounts accumulated from collections, which provide recovery in the current period for costs to be incurred in future periods. Deferred pension arises from changes in pension plan assumptions; differences between actual and projected experience; or differences between actual and projected investment gain/losses. See note 1(j) for further discussion of regulatory credits, and note 9 for pension. Operating Revenue Operating revenue is revenue generally derived from activities that are billable in accordance with the Electric Utility s Rate, Rules, and Regulations. Revenue is recorded in the period earned. The Electric Utility accrues estimated unbilled revenue for energy sold but not billed at the end of a fiscal period. Most residential and some smaller commercial accounts are billed bimonthly, and all other customers are billed monthly. 21 (Continued)
Unbilled electric service charges are included in accounts receivable at year-end. Unbilled accounts receivable totaled $25,730 and $27,551 at, respectively. Revenue is reported net of uncollectible amounts. Total uncollectible amounts written off are $723 and $837 for the years ended, respectively. The applicable allowances for uncollectible accounts are $853 and $983 at, respectively. See note 7 for discussion of pledged revenue. Operating Expenses Purchased power includes all open market purchases of energy, firm contracts for the purchase of energy, and the costs of entitlements for energy and transmission, as discussed in note 11. Fuel and generation include all costs associated with the City s ownership interest in SJ, the Combustion Turbine located in Anaheim. This includes the amortization of decommissioning costs for SONGS and SJ. Operations, maintenance, and administration expenses include all costs associated with the distribution of energy, administration, operating, and maintaining the local facilities, customer service, and public benefit programs. Regulatory Credits The Electric Utility s Rates, Rules, and Regulations provide for the Rate Stabilization Account (RSA), which contains two components: the Power Cost Adjustment (PCA) that was adopted by City Council on April 1, 2001, and the Environmental Mitigation Adjustment (EMA) that was adopted by the City Council on January 13, 2009. The PCA has mitigated variations in the power supply or fuel costs. The EMA will allow the recovery of environmental mitigation costs, such as greenhouse gas emissions costs, the marginal cost differential between renewable power and traditional-fuel-based power, and environmental mitigation costs. The RSA provides the City with operational and billing flexibility to mitigate material fluctuations in the cost of energy, loss of revenue, or unplanned costs, including unexpected long-term loss of a generating facility, unplanned limits on the ability to transmit energy to the City, or major disasters. The RSA funded by PCA and EMA collections is billed to customers through standard rates. As permitted by GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, and approved by the City Council, amounts collected for the RSA are deferred and recorded as regulatory credits in the statement of net position. The Electric Utility restructured its rates effective September 1, 2015 in order to more effectively align the recovery of the Utility s costs with the nature of the costs incurred. This was accomplished by reducing the Power Cost Adjustment (PCA) and the Environmental Mitigation Adjustment (EMA) with corresponding increases to base rates. The restructuring was designed to be revenue neutral to the customer. As of, the Electric Utility recorded deferred inflows of resources for regulatory credits of $22,468 and $23,140, respectively. 22 (Continued)
As of June 30, 2017, the EMA rates were $0.0005 per kwh for all customers regardless of the amount of energy used. As of, the Electric Utility recorded deferred inflows of resources for regulatory credits of $75,750 and $67,340, respectively. During fiscal year 2017, no RSA revenue was recognized to mitigate the impact of environmental mitigation costs. Provision for Decommissioning Federal regulations require the Electric Utility to provide for the future decommissioning costs of its former ownership share of SONGS. The Electric Utility has established a provision for decommissioning costs of SONGS and restoration of the beachfront at San Onofre. A separate irrevocable trust account was established for amounts funded, and these amounts are classified as restricted assets in the accompanying statements of net position. As of, the Electric Utility has recorded a provision for decommissioning costs for SONGS of $110,757 and $114,714, respectively. On June 7, 2013, Southern California Edison (SCE) announced the permanent retirement of the SONGS plant. The Electric Utility will continue to fund the reserve and recognize the expense until the end of the trust fund. SCE submitted a decommissioning cost analysis study to Nuclear Regulatory Commission (NRC) on September 23, 2014. According to the study for the decommissioning costs of SONGS, the Electric Utility s share of decommissioning costs was $110,756 at September 23, 2014. As of, the Electric Utility has paid $4,270 and $16,598, respectively, in decommissioning-obligations. The Electric Utility will continue to draw funds from the trust to cover its decommissioning-related obligations. The Electric Utility currently has $110,384 in an irrevocable trust for the decommissioning costs. The estimated completion of decommissioning is expected to take approximately 30 to 40 years. The Electric Utility has a 10.04% ownership interest of SJ. The Electric Utility is providing for the future demolition and reclamation costs of its ownership share of SJ. As of, the Electric Utility has recorded a provision for decommissioning costs for SJ of $5,720 and $5,280, respectively. The Electric Utility currently has $3,848 in irrevocable trust and $1,872 in the City restricted cash account. For the year ended, the Electric Utility has recorded decommissioning costs incurred for SJ of $440 and $440, respectively, which are included in the fuel and generation component. On July 31, 2015, the Electric Utility and the other Parties involved with the San Juan Generating Plants, agreed to a plan for the closure of two of four units. As co-owner of one of the units that is not being closed the Electric Utility is transferring the ownership rights to the parties that will continue in the Plant on December 31, 2017. The Electric Utility has been in discussions with the parties involved in the San Juan Generating Plant for the past several years related to the requirements and costs associated to bringing the plant up to environmental standards being required by the Environmental Protection Agency (EPA) and the State of New Mexico that would have required a significant capital investment in the plant that would make the ensuing power uneconomical. Further, the State of California, has limited investment in carbon producing generating facilities that extend the useful life more than five years. Also, with California renewable requirements being mandated to 50% this plant would further hamper the Electric Utility s portfolio flexibility. With this information, the Electric Utility 23 (Continued)
decided it would be in the customer s best interest to divest the Electric Utility interest in the unit and apply these resources to renewable needs. Based on the remaining projected useful service life of the Electric Utility participation in the plant, the Electric Utility is accelerating the depreciation over the period of July 1, 2015 to December 31, 2017 to reflect a write-off period of 30 months. Debt Issuance Costs Debt issuance costs, with the exception of prepaid insurance costs, are recognized as an expense in the period when the debt is issued, in accordance with the provisions of GASB 62. Prepaid insurance costs are capitalized and amortized over the lives of the related bond issues on a basis that approximates the effective-interest method. Deferred Charge on Refunding Bond refunding costs are deferred and amortized over the life of the old debt or the life of the new debt, whichever is shorter, on a basis that approximates the effective-interest method. These costs are shown as a deferred outflow of resources on the accompanying financial statements. Vacation and Sick Pay Vacation and sick pay for all City employees are paid by the General Benefits and Insurance Fund of the City. The General Benefits and Insurance Fund is reimbursed through payroll charges to the Electric Utility based on estimates of benefits to be earned during the year. Vested vacation and sick pay benefits are accrued in the General Benefits and Insurance Fund, and amounted to $1,905 and $1,938 for the Electric Utility at, respectively. Pension plan Full-time Electric Utility employees are members of the State of California Public Employees Retirement System (CalPERS) through the City s participation. The City s policy is to fund all required actuarially determined contribution; such costs to be funded are determined annually as of July 1 by the CalPERS s actuary. The Electric Utility participates in the City s Miscellaneous Plan. For purposes of measuring the net pension liability and deferred outflows/inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the City s CalPERS plans (Plans) and additions to/deductions from the Plans fiduciary net position have been determined on the same basis as they are reported by CalPERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. Transfers (to) from Other Funds of the City The City Charter provides that transfers to the General Fund of the City shall not exceed 4% of total operating revenue. Such transfers are not in lieu of taxes, and amounted to $19,032 and $17,358 for the years ended, respectively. 24 (Continued)